Non-Compete Laws Round-Up

Employers have used non-compete agreements, or restrictive covenants, to prohibit their employees from working for a competitor within a certain time period after leaving their job.  In recent years, a handful of states have passed laws partially banning these agreements.

Most recently, D.C. enacted the Ban on Non-Compete Agreements Act of 2020 (“the D.C. Act”), which became effective on March 16, 2021.  Although in states like Maryland and Virginia, bans on non-compete agreements only protect low-wage employees making below a certain salary, the D.C. Act applies to almost all employees working in the District regardless of salary, perhaps making it the most restrictive ban on non-compete agreements in the country.

The following is a summary of the non-compete laws currently in effect in our area.

Maryland’s Noncompete and Conflict of Interest Act (“the Maryland Act”)

Effective Date: October 1, 2019.  The law also invalidates all applicable agreements entered before this date.

Summary of the Maryland Act: Employers in Maryland are prohibited from entering into non-compete agreements with employees who earn less than or equal to (1) $15 per hour, or (2) $31,200 annually.

The Maryland Act specifies that employers can still enter into agreements with any employee, regardless of wage, restricting their ability to solicit clients or take proprietary information post-employment.  However, the law is silent as to whether non-solicit agreements in regard to other employees, or other types of restrictive covenants such as nondisclosure agreements, are restricted.  Further, the Maryland Act is not limited to post-employment activity; accordingly, the Maryland Act prohibits an employer from preventing a current, covered employee from working during employment for a competitor.

Penalties: There are no prescribed damages or penalties against an employer who violates the Maryland Act; but, agreements that violate the Maryland Act are invalid.

Virginia’s Ban on Covenants Not to Compete for Low-Wage Employees ("the Virginia Act”)

Effective Date: July 1, 2020.  Non-compete agreements entered before the applicability date of the Virginia Act remain enforceable.

Summary of the Virginia Act: The Virginia Act prohibits all covenant or agreements, including a provision of a contract of employment, between an employer and low-wage employee that “restrains, prohibits, or otherwise restricts an individual's ability, following the termination of the individual's employment, to compete with his former employer.”  Further, the Virginia Act states that an employee may provide a service to a customer or client of the employer, so long as the employee does not initiate contact with or solicit the customer or client.

The Virginia Act defines “low wage employees” as an employee whose average weekly earnings are less than the average weekly wage of Virginia.  The average weekly wage fluctuates and is determined by the Virginia Employment Commission (“VEC”). Currently, the most recent data provided by the VEC sets forth an average weekly wage of $1,217.  Accordingly, employers may not compel their employees making below this amount to sign a non-compete agreement.  Interns, students, trainees, and apprentices are considered employees for purposes of the Virginia Act.  In addition, independent contractors making less than the “median hourly wage” are also considered “low wage employees” under the Virginia Act.  (The current median hourly wage is $20.30.)  Virginia employees whose compensation is comprised wholly or “in predominant” part of sales commissions, incentives, or bonuses are not included in the definition of “low wage employee.”

The Virginia Act carves out an exception for non-disclosure agreements that are intended to prohibit taking and/or misappropriating trade secrets and proprietary or confidential information.

Penalties: The Virginia Act gives low-wage employees a private right of action and provides that employers that violate the provisions of the Virginia Act may be subject to a civil penalty of $10,000 for each violation.

Notice: Employers must post a copy of the Virginia Act or an approved summary in the same location where other employee notices required by law are posted. Employers who fail to meet such posting requirements after repeated notices of a violation are subject to additional civil penalties, up to $1,000 per violation.   Virginia has not issued an approved summary yet.

D.C.’s Ban on Non-Compete Agreements Amendment Act of 2020

Effective Date: March 16, 2021.  Non-compete agreements entered before the applicability date of the D.C. Act remain enforceable.

Summary of the D.C. Act:  The D.C. Act provides that no employer may require or request an employee sign an agreement that contains a non-compete provision.  A covered employer includes an individual, partnership, general contractor, subcontractor, association, corporation, or business trust operating in D.C., or any person acting directly or indirectly in the interest of an employer operating in D.C. in relation to an employee, including a prospective employer.  The definition excludes the D.C. and U.S. governments. The D.C. Act does not explain what it means for a business to “operate” in D.C. 

A covered employee includes an individual who performs work in D.C. on behalf of an employer, and any prospective employee who an employer reasonably anticipates will perform work on behalf of the employer in D.C.  The D.C. Act does not explain what it means to perform services, nor does it provide a threshold for the percentage of working time an employee must perform services in D.C. to be covered by the D.C. Act.  The D.C. Act excludes certain employees from coverage, which are:

  • A volunteer for an educational, charitable, religious, or nonprofit organization;
  • A lay member elected or appointed to office within a religious organization and engaged in religious functions;
  • A casual babysitter; and
  • A medical specialist having total compensation of at least $250,000 per year.

The D.C. Act carves out confidentiality agreements that protect the employer’s trade secrets, customer lists, or other proprietary or sensitive information, as well as sale or purchase agreements, where the seller agrees not to compete with the buyer.  The D.C. Act is silent as to non-solicit provisions; however, the legislative history suggests they are permissible.

Further, not only does the D.C. Act prohibit non-compete agreements after employment, but also prohibits such agreements during employment.  Specifically, the D.C. Act restricts an employer from prohibiting its employees from being employed by another person, performing work, or providing services for pay for another person, or operating their own business, whether through an agreement or workplace policy such as a “moonlighting” policy or conflict of interest provision.

Lastly, employers may not retaliate or threaten to retaliate against an employee who refuses to agree or fails to comply with an unlawful non-compete provision or workplace policy prohibiting simultaneous employment.  Employers are further prohibited from retaliating against an employee who raises questions or complaints about a non-compete provision that the employee reasonably believes to be unlawful or against an employee who requests a copy of the employer-mandated written notice.

Penalties: The D.C. Act provides recourse for an employee through a private right of action or submission of a complaint to the Mayor’s office.  Potential penalties include $500 to $3,000 per affected employee, depending on the violation.  Employers may also be assessed additional administrative penalties from $350 to $1,000 per violation of the non-compete and employee notice provisions, and more than $1,000 for violation of the anti-retaliation provision.  An employer that violates the non-compete prohibition, unlawfully bans an employee from engaging in simultaneous employment, or fails to provide the mandatory written notice must pay each employee subjected to the violation a penalty of between $500 and $1,000.

Notice: Employers must provide initial written notice to each employee within 90 days after the D.C. Act’s effective date, or by June 14, 2021.  Thereafter, employers must provide each employee with individual written notice within seven (7) calendar days after hire.  Employers must provide notice 14 calendar days after receiving a written request for notice from an employee.  There are no separate posting requirements.

Takeaways

If you conduct business in Maryland, Virginia, or D.C. and ordinarily use non-compete agreements with employees who are covered by these laws, evaluate alternatives that are not expressly prohibited under the Acts, such as confidentiality agreements or non-solicit agreements, to protect your company’s proprietary information and customer base, to the extent permitted by law.  In addition, review agreements entered into since October 1, 2019 (Maryland) and since July 1, 2020 (Virginia) to see whether they are valid.

Further, in D.C., be sure to review existing company policies pertaining to outside employment by employees and modify them according to the D.C. Act’s requirements.

Finally, review all onboarding and notice procedures to ensure compliance with any notice and posting requirements.

Please note that these are only statutory limitations.  Even if a non-compete agreement is permitted under the above Acts, it still could ultimately be ruled invalid or otherwise limited by the common law.  All employers implementing non-compete agreements should have the agreement(s) reviewed by an attorney.  For more information or if you have additional questions, contact Cori Schreider, Melissa Jones, or any member of Tydings employment and labor law practice.

This has been prepared by Tydings for informational purposes only and does not constitute legal advice.